Superficial Losses: Gains & Loss on Identical Properties

by Tax Guy - Burlington Accountant on February 18, 2009 Print This Post Print This Post

Although the end of the tax year is over, here is the text of an email from a visitor to Canadian Tax Resource who has some questions about gains and losses on identical securities.

Question: While calculating capital gains/losses for the year on identical stocks, do I need to calculate the gain/loss at the time of every sale or only a total gain/loss on all transactions combined for the year? Let me give an example:

Suppose I bought and sold the same stock on many days from Jan to Sep 2008. I had no shares when I started the year and had no shares as of end Sep 2008. I made a net small gain on all these transactions. Then in November, I bought more of the same stock which I did not sell by Dec 31st. If I include the cost of this purchase to calculate the ACB for the year, my gain becomes a loss for the year, as the ACB per share of purchases exceeds the average selling price per share for the year.

When I file my taxes for 2008, should I report a gain that I made on the transactions between Jan & Sep or should I report a loss based on the transactions for the full year? Thanks.

The taxability of capital gains and use of losses on sales of identical securities is different.

If you sold the security and there was a capital gain (the selling price exceeded the cost), then that gain is taxable. The fact you re-purchased the security again within 30 days or purchased the security 30 days before the sale is irrelevant in this case since the capital gain is taken into income immediately.

If you sold a security and there was a capital loss (selling price was less than the cost) AND you purchased the security 30 days before the sale OR re-purchased it 30 days after the sale, then the loss is denied.

The amount of the loss is added to the cost of the security. This rule essentially re-sets the cost base to what it was before the superficial loss transaction took place.

When evaluating a series of transactions, you have to look at each sell in the tax year and evaluate it on its own before moving to the next sell.

I hope this helps.

Follow-Up Question: Thanks very much for the reply. Your website is great and has lot of helpful information.

One quick follow-up question: Does the same rule apply to day-trading?

Looking at the result of each sell transaction will be very difficult if someone is doing day trading in one stock. Many times there could be multiple buys and sells on the same day and hundreds of transactions in a tax year.

You have an option to make an election to treat all of your trading in securities as either capital or income related transactions. In other words you may elect to have all of your trading considered either capital gains or losses or as income transactions.

If you elect capital gains treatment, you are better off for capital gains since the tax is ½ the normal rate. Losses (non-superficial) are applied to gains and can be carried forward back three years and forward indefinitely and can be only used against capital gains.

With the income election your gains and losses are not considered capital. In this case 100% of the gain is included in income and taxed at the full rate. Losses are losses and you may have other deductions available since you will be considered to operating a business.

This election should not be taken without the advice of a professional since the election cannot be undone later. My thought is that if you have been taking capital gains over the years, it does not make sense to make the election because of one or two bad years. You may make your life easier in terms of calculating your gains or losses but you will pay twice as much tax.

I would suggest that you implement a tracking system using a spreadsheet. I will be a lot of work for the current tax year but each future trade you make you can enter it into the sheet making you life easier at tax time. You should have columns for the date, the time, the buy price, and the sell price.

Get Help!

If you speak to a professional about your tax situation you might want to ask them to establish the tracking system for you. The cost of the accountant may be a few hundred dollars, but will be well worth the investment in the long run, especially if you are making multiple trades.

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

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Sasi Chacko March 5, 2009 at 3:18 pm

Great site, lots of tax information. I just have a follow up question on the subject, if I elect to have all my trades treated as “capita;” can I just add all the buys and sells on the same stock and take the difference to claim as a capital gain or loss in my tax return. Thank you.

Tax Guy March 5, 2009 at 8:41 pm

By default your gains and losses are capital for shares. In any given tax year gains and losses are netted and 1/2 of excess gains are taxable. Excess capital losses can be carried back 3 years or forward indefinitely and applied to capital gains.

Cesare Berti May 1, 2009 at 7:01 pm

I happened to see you site referenced in the Money Saver publication. Glad I checked it out, a very useful site!

I have somewhat related question re capital losses and the superficial loss rule. If I sell stock ABC for $20.00 on April 1 to crystallize a loss can I at the same time write a call option on that stock, expiring on June 23 (about 45 days later) for lets say $21.00 without negating my ability to claim the capital loss?

Tax Guy May 1, 2009 at 10:37 pm

If you reacquire the stock or have the right to acquire it, then the loss is superficial. You would not be able to write the call intil after April 30.

Vijay March 16, 2011 at 12:08 pm

It is very informative and helpful in understanding the gain/loss in stocks.
Thanks a lot

MD February 3, 2012 at 5:10 pm

If all my income for the year is from stocks and options,can I still have the option to treat it as capital gains or income?

Tax Guy February 5, 2012 at 2:38 pm

It depends. You have to consider the facts to determine if you are in the capital or income account.

RB March 15, 2012 at 9:57 am

Great article.
Just had a follow up question:
If I bought a stock on May 9 and sold it on May 19 at a loss – it follows the rule that it is denied since I purchased it 30 days before the date of sale. So this means I have a deferred/denied loss — does this mean that I can never recognize this loss? Or when do I get to realize it?

Tax Guy March 15, 2012 at 10:00 am

The amount of the loss is added back so that the original cost is restored.

RB March 15, 2012 at 1:00 pm

So the amount of the loss is added back, and the ACB of the stock becomes it’s original value on purchase, therefore, the loss is denied and I never get to claim it? Thanks for your reply.

Tax Guy March 15, 2012 at 10:57 pm

The loss is denied and cost restored. It depends on what you ultimately resell it for. Do the math on the transactions and you see how it works.

Now if you transfer to an RRSP at a loss, the loss is denied forever.

Michael james March 29, 2012 at 8:37 pm

I just wanted to clarify the information about repurchasing within 30 days of a profitable sale.
I spoke with my accountant today to help ensure I was handling capital gains calculations properly. When I asked about unrealized losses he jumped in to mention that I also have handle unrealized gains in a similar fashion. I pushed further and he assured me that I have to adjust the base cost if i repurchase within 30 days after a profit.
From what I’ve read online he appears wrong.

Tax Guy March 29, 2012 at 9:04 pm

Your accountant may not be explaining it well but there is no such thing as a superficial gain! The government will tax all gains when realized. Losses are subject to restrictions.

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